Many business leaders we speak with know their organizations need to radically reinvent themselves to excel in today’s digital marketplace. Often, with a vision and lots of excitement, they start down a path of transformation. But the farther the enterprise walks that path, the more that enthusiasm seems to get dialed down from something truly transformative to something more transitional.
A key reason for this is simply the short-term pressure to maintain or grow revenue. It’s difficult to blow up an existing business and build a new one without a near-term impact to the top line. Also, entirely new products are riskier than established ones.
Case in point
Adobe faced such a challenge with its “boxed” software portfolio of digital-media creative and design tools, Adobe Creative Suite.
Up until 2008, Adobe was doing well with its perpetual-license software model. However, the company was hit hard during the recession, as corporate spending slowed. Additionally, Adobe realized the number of creative professionals was not growing like it had been. Buyers of their software were likely to skip new versions because the existing versions worked well enough. Adobe needed a new business model if its industry-leading product set was to maintain its leadership position.
In 2011, the company announced it would move away from selling these products in the form of perpetual-license software, in favor of a cloud-based subscription service. At that time, these products made up about half of Adobe’s overall revenue. The company’s leadership knew cloud services were the future of the business; however, this decision was dramatic and Adobe faced strong objections from both investors and customers. Perpetual license software revenue was recognized immediately, while subscription revenue would be earned over time. This would impact earnings during the transition. And customers would have to continually pay Adobe for access to the software; previously, an upfront investment sufficed. This was something many customers were outwardly critical of.
In the cloud
Adobe tested its subscription-based creative tools in Australia and was encouraged by the results. But the company realized that to succeed they needed a product that was materially different, something entirely new. Thus, the birth of Adobe Creative Cloud, designed to leverage the cloud to store content, to work seamlessly across both desktop and mobile devices, to enable collaboration and to allow additional services to be added to it. Support was discontinued for the traditional products in a “burn the boats” fashion to expedite customer migration.
Adobe had previously charged $700 up front for its flagship product Photoshop. Thirteen million customers had purchased the software before Adobe switched to licensing a bundle of titles for only $10 per month. Revenue dropped from 2011 through 2014 as the up-front earnings from boxed software ended, but eventually the recurring revenue model began to pay off. In 2015, Creative Cloud was a $1.8 billion business, of which $1.1 billion was from recurring annual subscriptions. By the end of 2017, Creative Cloud is expected to be a $4.2 billion business, with $4.0 billion in recurring annual subscriptions.
Adobe has grown recurring annual subscription revenue nearly 4X over four years—an enviable feat. This successful transition to a digital service model included market testing, offering a materially different product, simplifying pricing and, most significantly, the fortitude to weather a decline in top-line revenue when switching revenue models. Adobe “ripped the Band-Aid off” to avoid customer and revenue delays and their bet has paid off. This summer, the company announced the incorporation of artificial intelligence capabilities into Creative Cloud—something that could never be done with their original product model.
Do you feel the weight of your existing business is limiting your ability to transform or even disrupt itself? You’re not alone. As you are finalizing your 2018 business plans and budgets, consider that you may have to give up something great in the short-term to achieve something spectacular in the future. What Adobe achieved, and how they did it, should serve as an inspiring case study.